Kramer Levin Files Amicus Brief for SIFMA and The Clearing House in Federal Housing Finance Agency v. Nomura Holding America

The Court of Appeals for the Second Circuit has scheduled argument for Nov. 8, 2016, in Federal Housing Finance Agency v. Nomura Holding America Inc. et al. This is one of the few significant mortgage-backed securities cases to go to trial. The trial court entered judgment in favor of plaintiff, the Federal Housing Finance Agency (“FHFA”), on claims under Section 12(a)(2) of the Securities Act of 1933 and parallel provisions of the Virginia and District of Columbia Blue Sky Laws arising from defendants’ sale of residential mortgage-backed securities to Fannie Mae and Freddie Mac. The judgment against Nomura Holding America, Inc. and related entities and individuals (“Nomura”) and RBS Securities, Inc. is for a total of $806 million. They have appealed.

Kramer Levin filed an amicus brief in support of the appeal on behalf of the Securities Industry and Financial Markets Association (“SIFMA”), an association of hundreds of securities firms, banks and asset managers, and The Clearing House Association L.L.C. (“The Clearing House”), the oldest bank association and payments company in the U.S., whose owner banks hold more than half of all U.S. deposits and employ more than two million people. Our amicus brief addresses three issues:

First, we argue that FHFA’s claims are time-barred under the applicable Virginia and District of Columbia Blue Sky Law statutes of repose. The district court held the statutes of repose were preempted by a provision of the Housing and Economic Recovery Act of 2008 (“HERA”) that extends the “statute of limitations” for FHFA to bring “contract” or “tort” claims. Our brief argues this holding infringes on important federalism principles. Virginia and the District of Columbia chose to define and limit the causes of action they created, and HERA should not be read to redefine those claims.

Second, we argue the court erred in finding as a matter of law, and precluding trial, on the question whether defendants can establish the “reasonable care” defense under Section 12(a)(2) of the Securities Act and parallel provisions of the Blue Sky Laws to FHFA’s claims. We argue that issues for trial were raised by the court’s findings that Nomura examined nearly 40% of the loans before it bought them and offered evidence that it met industry-wide due diligence standards, and that RBS tested two of the loan pools to be securitized.

Finally, we argue the court erred in ruling as a matter of law, and precluding trial, on the question whether defendants can establish their statutory loss causation defense that some or all of FHFA’s losses were caused in whole or in part by the economic collapse in 2008, and not by the prospectuses or oral communications with respect to the securities at issue on which FHFA grounds its claims. Those securities at issue represent less than 0.1% of the private label residential mortgage-backed securities issued during the relevant period. The court found this defense is barred because defendants cannot prove the economic collapse was “unrelated to the phenomena underlying the[ir] alleged misrepresentations.” We argue the court did not apply the correct standard under Section 12(b), which is whether any portion of the depreciation in the value of the security did not result from the part of the prospectus or oral communication on which the plaintiff grounds the defendant’s liability, not whether the depreciation was “unrelated to the phenomena underlying the alleged misrepresentation.”

We have filed eight amicus briefs on behalf of SIFMA within the past two years — one in the United States Supreme Court, four in the Second Circuit, two in the Fifth Circuit and one in the Ninth Circuit. The Clearing House joined four of these briefs and the American Bankers Association joined two.

Michael J. Dell, a partner in Kramer Levin’s Litigation Department, and Karen S. Kennedy, a special counsel in the Litigation Department, worked on the brief.